You’re considering starting a new business and with so many options, perhaps you’re unsure what kind of company you want to operate as. You might be weighing the pros and cons of your choices, including this question: LLC or LLP, which one is better? The best thing to do here is to research both options so that you can determine which one might be best for you, based on the nature of your business idea. Use this article as a starting point as you evaluate the differences, as well as the advantages and drawbacks to each choice.
LLP or Limited Liability Protection
In an LLP, the owners are deemed as partners in the business. In this set up, partners have some degree of legal protection from liabilities held by each of them. There is a minimum requirement of two partners to create an LLP and it’s a good choice for certain industries. That includes architects, accountants and lawyers. There should be a partnership agreement that hashes out the logistics, including responsibilities and liabilities. There are restrictions in some states, so be aware of how an LLP works before you choose this option.
LLC or Limited Liability Corporation
This business model has legal perks as it separates financial responsibility from the owners because it’s considered its own entity. That means that if there is business debt, it cannot be taken from an owner’s personal accounts. In this set up, the owners are considered members of the LLC and at least one member is required to form the business. Like a limited liability partnership, there are some regulations about how the company is formed so familiarizing yourself with this is important, when choosing between LLC or LP, which one is better.
What are the Main Differences?
Above you read a bit about how both an LLC and an LLP operate. Clearly, there are some differences. This section will go into that a bit more in depth so you have more information to guide your decision. One major difference is that in an LLC, a member’s liability is limited to what that they put into the business, financially. No member can be held liable for the financial mistakes of other members. In and LLP, however, partners can be held liable for business mistakes in general. In an LLP, one partner should be designated as one who holds primary liability, while the other partners will have limited liability responsibilities.
When it comes to managing the business, an LLC is a bit more flexible in terms of management style and who makes which decisions. This should all be detailed in an operating agreement when the business is formed. While an LLP is a bit more rigid in this regard, a partnership agreement can list the roles and responsibilities of each partner.
Taxes are another consideration. An LLP can only be taxed as a partnership, while an LLC has a few options, including being taxed as a sole proprietorship, a C-Corp, an S-Corp or a partnership. An LLP’s profits and losses are reported on the individual’s taxes, while an LLC separates business finances from personal ones.
For all the help you need deciding between LLC or LLP which is best, , contact Corporation Center. Our experts are here to help you.